The different factors that determine loan rates

U-T San Diego

With home lending rates on the rise in 2014, it’s important for buyers to understand how the mortgage rate on their loan is determined. Understanding the different factors that affect loan rates can help those shopping for new homes make smarter buying decisions.

“Nine out of 10 borrowers I talk to do not understand the different factors that will determine the rate on their loan,” says Michael Deery, president and mortgage specialist with Citywide Financial Corp.

Deery recently shared factors that determine the interest rate on a home loan, all based on basic economic fundamentals.

First, the Federal Reserve has a major impact on lending costs. Following the economic downturn in 2008, the Fed pumped additional money into the markets to kick-start the economy via their monetary stimulus program, “Quantitative Easing.” This program resulted in historically low home lending rates and helped the U.S. economy begin to recover. After U.S. economic data noted improvements, the Fed began to taper its easing policy at the begining of 2014. This tapering, which is slated to continue, has already caused mortgage rates to increase by roughly .25 percent.

Although factors such as the Fed’s monetary policies are beyond the control of borrowers, other determining factors for mortgage rates are things that a buyer may be able to address to help keep their lending costs lower.

Deery notes that credit scores are one of the biggest personal factors that impact the interest rates that buyers receive on their mortgages.

“It is no secret that having good credit scores are important for buyers in this market to score the best rates, and this is especially true for conventional rates,” says Deery.

Deery recommends that everyone obtain a copy of his or her credit report annually. Knowing a credit score can help buyers address fixable concerns before seeking a home loan.

“On my website,

www.citywidefinancialcorp.com, I share a variety of education and improvement tips that can help individuals improve their credit and qualify for lower lending rates,” says Deery.

Another factor that can determine the interest rate on a loan is the size of the down payment a buyer will use in the purchase. The larger the down payment, the lower the interest rate. The importance of equity – or down payment — is equally important for homeowners who are trying to refinance their current loan: the more equity they have in their home, the lower the interest rate they may obtain during refinancing.

Both equity and sizeable downpayments relate to another factor than can impact a mortgage rate: the amount a buyer borrows.

“Rates on loans less than $417k, which is the conventional loan limit, will have a lower rate than a loan greater than $417k, which is considered a conventional jumbo loan,” says Deery.

The type of property a buyer purchases as well as its intended purpose also affect lending rates.

“Someone buying a condo with 20 percent down or less with conventional financing will get a higher rate than someone purchasing a single-family residence. And, a loan on an investment property will have a higher rate than a primary residence,” says Deery.

“Overall, it is still a great time to buy a home,” said Deery. “The average 30-year fixed mortgage rate over the past 40 years is roughly 8.7 percent, and 6.5 percent over the past decade! For buyers who are still on the fence, a rate below or near 5 percent is still great.”

Deery recommends that homeowners who have been unsure about refinancing should not wait longer. He also recommends that those shopping for new homes should get approved at a rate that is roughly .25 percent higher than normal. This tactic will ensure buyers can still afford the payments in the event rates rise.

Deery also reminds buyers to focus on the monthly payment of their loan and not just the interest rate.

“Is the monthly payment still affordable?” he asks. “If the payment is still affordable, do not focus on the interest rate.”

Deery shares additional information about mortgages, lending rates and other buying and lending tips at